Americans in Debt: Just How Bad Off Are We?

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There are a number of possible reasons the recovery has been slower than expected. Foreclosures. Banks making fewer loans. American companies doing more of their hiring overseas. The adoption of new regulations to stop another financial crisis. My colleague Roya Wolverson has discussed, here and here, the things that could be a continued drag on the U.S. economic recovery, or even send us back into recession.

On Tuesday, the Wall Street Journal took a look inside the disappointing recovery and found a different answer for why the U.S. economy could continue to be weak: Consumer debt.

Getting rid of debt could be a long and slow process.To get back to a 1990s debt-to-income ratio of 84%, households would either need to pay down another $3.3 trillion of debt, or see their incomes rise $3.9 trillion. That’s equivalent to about nine years’ worth of income growth in normal times, estimates Credit Suisse economist Dana Saporta.

Nine years. Wow. That means we could be in our current state of non-recession recession until, say, 2020. That would be the year my daughter, who was born about a month after the technical end of the recession, turns 10. That would be something to worry about, if it were true. Yes, the rise in consumer debt has made this recession worse than usual. But fortunately, for all of us, our collective consumer debt, even in its current unbalance state, is unlikely to be a drag on the economy through the next decade. Here’s why:

(see 25 People to Blame for the Financial Crisis)

First of all, household consumer debt, as the WSJ states, is already falling. It peaked at 127% of income in 2007, and is now down to 112%, which is still a lot, to be sure. My guess is that consumers would go back to their spending ways long before we got to the level of debt we had in the 1990s. Debt is like gasoline prices – once you get used to the higher levels it tends to change your behavior less.  Second, and more importantly, we are talking about debt levels here. Not actual dollar amounts. There are a lot of ways that debt levels can drop, and rising incomes or consumers paying down debt are only two of them. In fact, the biggest driver of the current drop in debt levels are not more thrifty consumers, but less aggressive banks. Last time I looked at the figures, about 65% of the drop in consumer debt was because of bank write-offs. That number might actually get bigger. At the beginning of the recession, banks had so little capital that writing-off debts wasn’t possible. But as we get further away from the financial crisis and bank balance sheets improve, we are likely to see more and more banks cancel the debts of consumers they don’t think can pay up. For example, it appears that JPMorgan Chase and Bank of America have recently been lowering the principal owned by borrowers who bought or refinanced their homes with risky pay-options mortgages. Principal reductions are something that were very rare even a year ago. Now expect to see more of it.

(see What U.S. Economic Recovery? Five Destructive Myths)

The other reason why it won’t take until 2020 for consumer debt to get back to its 90s level has to do with the make-up of consumer debt. Of the roughly $11.5 trillion that consumers owe to banks and other financial institutions, about 74% of it is mortgage debt. And that level of debt has a lot to with the price of housing. Mortgage debt grew dramatically in the housing boom. Falling or stable housing prices are  unlikely to produce the run up in debt that we had in the past decade. As people continue to move away from housing as an investment vehicle, mortgage debt is likely to drop, and with it our overall level of debt as well. Let’s hope.

Stephen Gandel is a senior writer at TIME. Find him on Twitter at @stephengandel. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.